The Central Bank of Ireland (CBI) has written to asset managers with funds domiciled in the region demanding action after a review found some UCITS fund performance fee calculations had the potential to overcharge investors.
Following an inspection in UCITS performance fees, the CBI found some fund management companies were not calculating fees in accordance with its guidance and/or inadequately disclosing information on fees to investors.
As a result of the findings, all asset managers with UCITS funds domiciled in Ireland - a key domicile for UK firms - will now be required to confirm to the regulator that they have carried out a review of their existing methodologies in order to ensure compliance.
In a 4 September letter, head of securities and markets supervision at the CBI Patricia Dunne told asset managers the regulator's review generally observed "good practices" across fee calculation, but "approximately 10% of the sample of UCITS sub-funds, instances of non-compliance with the guidance".
She added: "The [CBI] is concerned that the guidance is not being applied in a consistent and comprehensive manner, which, in some cases, may be detrimental to the interest of UCITS and their investors."
Dunne explained asset managers must take action to "mitigate these issues", and the Irish regulator would be commencing "supervisory engagement with the individual UCITS that were the subject of the review, where specific supervisory issues were identified".
Specifically, the regulator identified "inadequate disclosure informing investors that where performance fees are paid on the basis of the high water mark approach", which may result in fees being "accrued as a result of market movements rather than due to the performance of the investment manager".
It also found cases where it was unclear as to which version of an index was being used to calculate outperformance by which to charge investors.
Elsewhere, the CBI found "poor practices" from both depositaries and fund administrators in the verification and calculation of performance fees respectively.
In a statement, the CBI's director general of financial conduct Derville Rowland said: "We are concerned the guidance is not being applied in a consistent and comprehensive manner across industry, which could lead to the overpayment of performance fees by UCITS and their investors.
"Investors in regulated funds have a right to expect that they will be charged the right fee and that the firms and individuals overseeing this process are operating to a high standard.
"The findings of this review highlight the need for individuals within regulated firms to be vigilant, especially as we now move to have our guidance on performance fees become binding rules.
"We are requiring all fund management companies whose UCITS charge performance fees to review their existing methodologies and confirm their compliance to the Central Bank, and we will continue to engage with those individual UCITS that were the subject of this review and to monitor fees charged to ensure that the best interests of investors are protected."
Asset management and investment funds partner at law firm Dillon Eustace Etain de Valera said despite the pressure on firm's to review UCITS performance fee calculations and disclosure, "investors can take comfort from the fact that the overwhelming majority of those UCITS reviewed are in compliance with the relevant CBI rules".
She added: "The requirement to undertake a review of performance fee arrangements before end November will further ensure that Irish UCITS have ‘best in class' disclosure and transparency around their performance fee methodologies as well as giving confidence to investors that performance fees are calculated in accordance with the CBI rules which have been designed to protect the best interests of investors."
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